#445 | Making the Market for Life Insurance
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For as long as I’ve been in the life insurance industry, there has been persistent chatter about the life insurance “need-gap” reported by the annual LIMRA/Life Happens Insurance Barometer Study. The need-gap “represents the total level of self-reported insurance need among all American adults aged 18-75.” Since 2011, the need-gap has expanded from 35% to 42%. Two thirds of the gap comes from the 49% of the population without any life insurance. The remainder comes from the 51% of the population that has life insurance but needs more coverage, including the 13% of the population that only has group life insurance coverage from work.
Over the past decade, billions of dollars were thrown at solving this problem, primarily through direct-to-consumer models focused on selling rapidly underwritten Term insurance online. Prudential’s 2019 purchase of fledgling Assurance IQ for $2.35 billion in 2019 set off a frenzy of activity in this space. Select Quote roared to a $5.25 billion market cap in early 2021. A few months later, Ethos raised $300 million at valuations over $2 billion. PolicyGenius planned an IPO rumored to be over a $1 billion valuation. MassMutual spent hundreds of millions on Haven. All of these platforms – and many, many more – were all built on the fundamental premise of solving the need-gap with easily accessible and rapidly underwritten term insurance sold online.
By any metric, all have spectacularly failed according to their original premise. Prudential wrote off the entire purchase price of Assurance IQ in 2024 and then, as if to add insult to injury, forked over $100 million to the FTC for “systematically deceptive” marketing practices in the unit. Select Quote is now trading at a market cap of $250 million with wafer thin volume. Haven is gone. PolicyGenius was taken over by Zinnia. Virtually all of the others have also fallen away or, like Bestow, have transformed into something else. The promise of a D2C future is largely dead.
The lone exception is Ethos, which filed for an IPO a few weeks ago and shows profitability of around $31 million for the first half of the year*. The company touts itself as a digital platform for growth to meet a massive unmet need in the market as identified by – you guessed it – the Insurance Barometer Study, which is quoted on page 1 of the prospectus. But even Ethos is pursuing a dual-distribution strategy by both offering an easy online purchasing process for term insurance and partnering with agents to use its technology for sales. They’ve even branched into selling Indexed UL through FE-oriented MLMs with proprietary products.
Despite the failure of these platforms, there is still no doubt that Americans don’t have enough life insurance. If anything, the LIMRA study dramatically underestimates the true need-gap because it relies on self-reporting. Consumers have no frame of reference for the “right” amount of life insurance and, if anything, dramatically underestimate their own insurance needs. The study has a question asking about the estimated cost of a term insurance policy and uses a 20-year, $250,000 policy on a 30 year old as the example. As you can imagine, a high percentage of respondents overestimate the annual premium by huge margins. Nearly 40% of respondents overestimated the cost by more than 5x. Life insurance is cheaper than people think.
The funny thing about LIMRA’s example is that it is a terrible one to use. A $250,000 Term policy is a bad deal. Using Banner Term quotes for the same cell as in the LIMRA study, the pure administrative cost is around $75 per year. The price of $250,000 is $144 per year, which means that less than half of the premium is related to the actual mortality component and premium-based commissions. Doubling the death benefit only adds $70 per year in incremental premium. Quadrupling it only adds $213 per year. More death benefit is always more efficient than less death benefit.
Life insurance may be much cheaper than people think, especially on the margin as the death benefit increases, but people also need far larger policies than they think. Very few people should buy a $250,000 Term policy. A 30-year-old buying life insurance should have at least 10x their annual income in death benefit coverage. A $25,000 annual income is the 16th percentile for a 30-year-old, implying that most people should have much higher death benefits. The fact that LIMRA chose a $250,000 death benefit is an indication of just how misguided people are about their own insurance needs.
Fortunately, LIMRA’s example isn’t even indicative of the Term market. The average Term face amount across the industry is $560,000, which is in-line with the US national average salary of around $64,000, but that figure varies significantly by insurer. In the graph below, each dot represents an insurer. The size of the dot is the total number of policies sold. The x-axis represents the average face amount of the term policies sold by that insurer. The two largest issuers, State Farm and Primerica, represent nearly a third of all Term policies sold in the industry and both have an average face amount below $350,000.
Two points are clear – people simultaneously underestimate their own need for life insurance and overestimate the cost of coverage, even term insurance. As a result, life insurance falls into the category of something that many people don’t think is “worth it.” The life insurance industry must fight both heads of the monster. We have to convince people that life insurance is something they really need and in an amount much larger than they initially thought. From there, we have to also show that the products have value commensurate with the cost. This is no easy feat.
If we’re successful, the irony is that people will end up spending roughly the same amount of money that they thought they would for life insurance, but they’ll be getting 5 times the death benefit. And, more importantly, they’ll understand that life insurance actually is worth it because they’d be getting the amount that they actually need at an efficient price, not less than what they think they need at an inefficient price. It’s a logical and cohesive argument rooted in fact. It seems like everyone should understand this dynamic. So why don’t people buy more life insurance?
The underlying assumption for the D2C model was that people actually do understand the argument and want to buy term insurance, but they don’t want to talk to an agent and go through traditional underwriting. If that were true, then all you need is a slick website, an easy buying process and enough money to throw at buying clicks on Google and you’ll be selling life insurance hand over fist. The irony is that although those firms were quick to point out the life insurance needs-gap as evidence of the opportunity in the market, they didn’t bother to read the rest of the report to see that distrust of agents was ranked 2nd to last in the factors cited by consumers for why they didn’t buy the life insurance that they need.
Despite the billions of dollars poured into D2C models, term insurance sales across the industry are flat. In 2014, there were 2.4 million Term policies sold at an average face amount of $415,000 for a grand total of $1 trillion of death benefit. In 2024, there were 2.4 million Term policies sold at an average face amount of $560,000 for a grand total of $1.3 trillion of death benefit. That is perfectly in keeping with inflation. The problem isn’t access, agents, underwriting, process or pricing. All of those things have gotten better in the last decade. None of it mattered.
Why? Because the problem goes far deeper. No one wants term insurance. It’s not exciting. It’s not sexy. It’s an expense for the benefit of loved ones. There will only be so many people who have the capacity and willingness to spend money now to solve a future problem. Not all of those people have families to protect. Not all of those people are healthy enough to get coverage. The ones who buy it, will buy as little as possible to feel like they’ve checked the box. There is a finite market for pure death benefit protection. No matter how much we improve the process, it will only grow the market on the margins.
The same phenomenon has played out in the market for pure lifetime death benefit protection, which is embodied by the moribund Guaranteed UL market. Both products are pure protection plays. Back in 2014, Guaranteed UL accounted for 132,000 policies with an average death benefit of $380,000 and total premium of $2.7 billion. Last year, Guaranteed UL had shrunk to just 22,000 policies and $240 million of total premium. The problem isn’t pricing. I’ve been keeping an eye on GUL pricing for one particular cell – Male, 55, Preferred, $1M of DB – since 2008. The most competitive price usually sits at around $12,000. That was true back then and it’s still true now. The only difference is which carrier is offering it.
The Term and Guaranteed UL markets stand in stark contrast to the consistent growth over the same period in other life insurance products, particularly Indexed UL and Variable UL. All of these products provide the same death benefit protection. For Term and Guaranteed UL, that’s where the conversation stops. But for other types of permanent insurance with cash value, death benefit protection is where the conversation begins. The mere presence of cash value allows the conversation to extend to both tax and asset protection, all within the same product. People will never want death benefit protection, but there is a very real chance that they could want cash value.
The common perception is that cash value is some sort of an extra, bolt-on feature of a life insurance policy and that the most natural type of life insurance doesn’t have it. If every other kind of insurance doesn’t have cash value, then why should life insurance? Because life insurance isn’t like other types of insurance. Every other type of insurance covers the potential for an event to happen. Life insurance is unique in that it covers an event that is inevitably going to happen to everyone. As a result, the ironclad law of mortality is that the longer you live, the more likely you are to die. No other insurance product is so tightly correlated to and dependent on one factor that you can’t control. Therefore, it makes perfect sense that mortality tables look like this relative to a constant amount of Net Amount at Risk, which is $1M in this example.
This is the natural slope of mortality. Anyone who wants to only pay the natural value of mortality for their lifetime will pay along this slope. The crazy part, though, is that paying along the slope doesn’t work. For this 55 year old Male, the total premiums paid will exceed the death benefit at age 91, just a couple of years after Life Expectancy. By age 100, total premiums will be three times the death benefit. By age 110, total premiums are seven times the death benefit. Following the natural mortality slope is a trap. It works in the short-term when mortality incidence is low but becomes untenable precisely when the policyholder needs the coverage the most.
The only way to prevent that from happening – the only way, in other words, for life insurance to actually work – is to allow policyholders to pre-fund the future mortality costs through a level premium structure. In order to do that, they have to pay more than the natural cost of mortality early in the life of the policy. Those overpayments are then set aside as a reserve against the death benefit that builds up over time. This is a phenomenon almost wholly unique to life insurance. Property and casualty companies focus on premiums and policy count as their gauges for size. That makes sense given the short-term, incident-driven nature of property and casualty insurance. Life insurance, however, is a long-term product focused on an inevitability. The metric to gauge size is reserves set aside for future claims that will inevitably happen over time.
If a policyholder leaves before the claim is paid, then they should be able to take their overpayments that have accrued at interest after expenses with them. What do we call that? Cash value. No other type of insurance has a cash value because no other type of insurance needs one in order to function properly. But life insurance does. Once you put cash value into the mix, you have a perfectly natural solution to the problem of an upwardly sloping mortality cost.
Cash value is the natural mechanical element that allows life insurance to work. It’s not a bolt on-feature in the same way that an engine isn’t a bolt on feature for a car. There is no life insurance without cash value – not even Term and Guaranteed UL. In both situations, life insurers artificially strip out cash value while still retaining policy reserves that mirror what should be provided as cash value. The benefit to the carrier is that lapsing policyholders release reserves that don’t have to be paid out in cash and can be retained as profit. Lapsing policyholders are essentially paying for persisting policyholders. Removing cash value is an artificial construct to modify the tradeoffs in the product.
Although cash value is naturally and necessarily integrated into every life insurance chassis, it has characteristics that are unique and distinct from the death benefit. I covered this idea extensively in #430 | Leverage and Life Insurance. The short version of the story is that death benefit is mortality leverage and, like all types of leverage, has a cost. In this case, mortality leverage is funded with a mortality cost through COIs**. Cash value is equity and, like all types of equity, earns a return. Over time, a permanent life insurance policy naturally diminishes leverage and grows equity. It transforms, in other words, from a future asset in the form of a contingent death benefit to a current asset in the form of cash value.
As it transforms, it begins to take on more of the characteristics of the equity and less of the characteristics of the leverage. You can see this dynamic clearly playing out in the graph above. The policy starts as 100% leverage and 0% equity, but it ends at 100% equity and 0% leverage. The returns characteristics of the equity component – the cash value – depend on the product type. Whole Life and Universal Life pass through the yield of the underlying investment portfolio in a declared coupon rate. Indexed UL uses the coupon rate to buy options that provide limited exposure to equity returns. Variable UL allows for direct investment in mutual funds. Just like any type of equity, there is no perfect investment. There are only tradeoffs.
However, the equity in life insurance has a distinct advantage simply because of its location that no other asset class can match. IRC Section 101 clearly states that life insurance death benefit proceeds are tax-free. This is entirely consistent with the way the IRS treats all other types of insurance payouts. Because cash value is necessary for the proper functioning of providing the tax-free death benefit, the IRS clearly outlines the relationship between cash value and death benefit in Section 7702. As long as a policy is compliant with state insurance standards and 7702, then cash value will grow tax-free beneath the umbrella of the tax-free death benefit. This is all perfectly logical. But it’s also magical – as life insurance transforms from leverage to equity over time, the tax-free nature of the leverage is also imputed onto the equity as long as the policy remains in-force. As a result, the equity can grow and be accessed tax-free.
Cash value is an asset. The fact that banks and insurers will collateralize it for instantaneous liquidity is evidence that it is real money. As I’ve written in numerous other articles, the return profile of fixed cash value products mirrors high quality fixed income over the long-run. Variable UL allows for actual investments in real mutual funds from all of the major fund companies. It seems so obvious that cash value is real equity earning real returns that deserves a real place in a holistic financial plan. It offers mortality leverage, tax control and, for fixed policies, a distinct and unique return profile. Cash value should be a slam dunk.
But it’s not. If you thought it was something of a failure that billions of dollars in spending by D2C companies didn’t yield any growth in the term market, then consider the fact that the life insurance cash value across all life insurance companies in the entire industry is $1.25 trillion. If that sounds like a lot, let me put it in context:
A single equity mutual fund at Vanguard has twice the cash value of the entire life insurance industry. A single bond fund at Vanguard has twice the cash value of the largest block of fixed life insurance in the country, which is at Northwestern Mutual. Total assets at Vanguard are roughly 10 times the cash value of the entire life insurance industry – and Fidelity is even bigger. It is not an exaggeration to say that life insurance cash value ranks as a middling player in the grand scheme of US savings assets.
It wasn’t always this way. Whole Life in the United States pre-dates the creation of modern mutual funds by nearly a century. The first participating Whole Life policy was created in 1843. By the mid-1800s, life insurance was a common and popular savings vehicle. The fact that life insurance cash value has been relegated over the last century to a largely irrelevant position in the overall narrative of financial planning in the US is no fault but our own. So much change has occurred in the broader retail investing landscape. Funds are more accessible, lower-cost and flexible than ever. Very little of that change has made its way over to retail life insurance.
The great irony of the D2C revolution is that the core premise was correct. Creating simple, digital-first, accessible and rapidly underwritten products is the way to grow the market. What they all got wrong was the product. No one gets excited about pure protection products – but they can get excited about permanent insurance, particularly permanent products that are actually designed with consumers in mind. In my experience, the more people understand the power of cash value in life insurance, the more they want it. And if we can give them what they want with fewer hurdles, then we have a real shot at growing the market.
The exact same thing occurred in retail investing. For a long time, stockbrokers were the intermediaries pitching and executing trades. That inevitably constrains the size of the pie. As soon as investing became broadly accessible, retail trading went through the roof. Far more people participate in investing today than did decades ago when the barriers and costs were high. The same transition is overdue for life insurance. The natural hurdles to the product do, in fact, constrain the natural size of the market. Lowering those hurdles will grow it.
As the hurdles lowered, the role of the stockbroker gradually (and sometimes forcibly) changed. Now we have financial advisors that get paid to provide advice, not to execute transactions. Their stature has been elevated. The same path is available for life insurance. Agents today play the same role in life insurance as stockbrokers once did for investments – they pitch the product and execute the sale. If the barriers are lowered and the products are more accessible, those agents will turn into true insurance advisors. But more importantly, financial advisors who are not agents (and often vehemently so) will finally feel comfortable talking about life insurance as an essential part of a holistic financial plan. The artificial wall between the broader financial world and the most powerful, compelling and sophisticated of retail financial products – permanent life insurance – will eventually fall.
At least, that’s the hope. In the meantime, we still have a great story to tell. I own and overfund permanent life insurance because I need mortality leverage in the case of my untimely death and the characteristics of cash value equity for my long-term financial plan. I don’t think I’m particularly unique. I think most of my friends and neighbors should do the same thing. What separates me from them? I know how life insurance works – and you do too. We’ve had the lightbulb moment. The industry won’t grow by making life insurance cheaper. It will grow when we stop trying to sell pure death benefit protection and start helping people understand that permanent life insurance transforms from leverage to equity, from protection to wealth, from insurance to legacy. That’s not a product. That’s financial control. That’s how we make people actually want life insurance – and that’s how we grow the market.
*On its face, this is hugely impressive for a D2C distributor given the demise of most of the other firms that pursued a similar model, but there are at least two caveats. First, Ethos raised money at a $2.6 billion valuation and $70 million of annual earnings implies a valuation nowhere near that level, even though Ethos’ profitability seems to be growing. Second, and even more importantly, a major part of Ethos’ profitability stems from front-loading earnings based on assumptions about future receipts of commissions earned on policies sold within the period. This is an accepted accounting practice, but it creates a situation where initial profitability looks higher than it is because all future profits are recognized immediately and potential future losses could occur if assumptions deviate from the base case. It’s difficult to know real profitability with Ethos, particularly given that the company is still barely breaking even on cash flow and only doing so because it was selling securitizations of future commission flows. There’s a lot going on in the Ethos S-1. It’s a simple business with some complicated accounting. The IPO is going to be very interesting to watch.
**I’m using this term loosely. No product has charges that are solely related to actual experienced mortality because that is unknown. Leverage costs related to mortality can cover a range of charges and structures. But for simplicity, I just refer to all of that as COIs.
